The Trump Era 2017 Tax Cuts and Jobs Act changed the tax code by reducing the income tax brackets of individuals and corporations. President Joe Biden, after entering office in January 2021, is working to reverse parts of the 2017 changes. Now into the first few months of the new administration, the President has proposed or enacted changes to the landscape on individual and corporate taxation for many taxpayers at all income levels.
It is important to consider that while some of the changes have been enacted, like the American Rescue Plan, which was signed into law on March 11, many of them need to be passed by Congress before becoming law.
President Biden's three-part program (information is as of the day of writing and subject to change by
the administration and Congress) includes The American Rescue Plan, The American Jobs Plan and The
American Families Plan. The American Jobs Plan and The American Families Plan are proposals currently
being considered by Congress.
The enacted American Rescue Plan provides additional stimulus checks of up to $1,400 per qualifying
person; increased child tax credits, earned-income credits and child and dependent care tax credits;
extended unemployment insurance payments through September 5, 2021, and exclusion from income
on the first $10,200 of unemployment benefits for taxpayers with incomes of less than $150,000; and a
new grant program for restaurants.
The proposed American Jobs Plan, according to the official White House website, will "create millions of
good jobs, rebuild our country's infrastructure and position the United States to out-compete China."
This proposal, if enacted in its entirety, "will:
- Fix highways and bridges; upgrade ports, airports and transit centers.
- Rebuild clean drinking water infrastructures, a renewed electric grid and high-speed broadband to all Americans.
- Modernize home, commercial buildings, schools and federal buildings.
- Create caregiving jobs and raise wages and benefits for essential home care workers.
- Revitalize manufacturing, ensure products are made in America, and invest in innovation.
- Create good-paying union jobs and train Americans for jobs of the future."
The proposed American Families Plan includes making education more affordable by providing two
years of free community college education for Americans; Universal access to high-quality free Pre-K for
three and four-year-olds; funding to address teacher shortages; limit the cost of high-quality child care for low-income taxpayers; provide comprehensive paid family and medical leave for certain illnesses; and expand nutrition assistance and funds for maternal health services.
Proposed Tax Changes
To fund the proposed law changes, the administration has suggested that:
- The highest individual federal income tax rate increase from 37 percent to 39.6 percent.
- The corporate tax rate increase from 21 percent to 28 percent, with a 15 percent minimum tax rate on corporate book income.
- American corporations be taxed on foreign income at 21 percent.
- Taxpayers with over $1 million of income be taxed at 43.4 percent on capital gains.
- Certain child tax credits scheduled to expire at the end of 2021 be extended through 2025.
- The step-up in basis at death and carried interest rules currently in place be eliminated.
In addition, there are other proposals which have received attention during the past year. One of the
more notable is the reduction in the amount of wealth that can be left to your heirs at death, although
President Biden's April 2021 proposal did not address this issue. Another is the addition of a 12.4
percent Social Security payroll tax for wages above $400,000, one-half paid by the employee and one-
half paid by the employer.
Tax Planning for your Finances
Many taxpayers are wondering if these enacted and/or proposed changes will affect them. The answer
is "most likely." While every taxpayer situation is unique, determining how the proposed laws could
affect you requires study. For example, if you anticipate selling a business or an investment such as
stock, the timing of the sale could affect the tax you pay on the income you generate. The year you make a charitable contribution could affect the tax savings made possible by the gift. If you are considering making gifts to family members to reduce the size of your estate for wealth transfer purposes, the timing of the transfers could be crucial.
There are many factors that must be considered in selling and gifting. Will the proposals pass? Will future law changes modify any current changes? Are long term financial and estate planning needs
more important than taxes?
Take time to plan. Review all of the options available and study before making quick decisions. Plan now, before changes go into effect, as changes could be enacted as of the date introduced, or even, in some cases, could be retroactive to the first of the calendar year. While nothing is for certain, planning based on the best information available will assist you in your decision making.
Gerard J. Kassouf, CPA, CFP® is a tax and financial advisor with Kassouf & Co., P. C., a regional advisory, tax and accounting firm headquartered in Birmingham, AL.